Businesses in the UK are seen as takeover bargains
Investors are tracking a number of undervalued UK companies, including household names in gambling, energy and fashion, as some of the world’s lowest equity valuations raise the prospect of a new round of takeover deals.
A survey of 15 risk-arbitrage desks, fund managers, traders and analysts across the UK and Europe showed that sportsbetting firm Entain, Scottish energy provider SSE and luxury-clothing brand Burberry are flashing brightest on investor radars.
Precision-engineering company IMI, publisher Informa and Spire Healthcare were also tipped as takeover targets by the respondents, who were polled informally by Bloomberg from August 24-31.
The breadth and quantity of the names reinforces a longheld impression that UK businesses are cheap in comparison to European and US firms, and that there are bargains to be had if the British economy can move on swiftly from Covid-19 and Brexit. Low valuations, coupled with cheap financing and a favourable regulatory backdrop, are turning the country into a hotbed of global deal-making.
This year is already close to being the strongest for mergers & acquisitions activity in the UK since a bumper 2015, with $229bn of deals completed and four more months remaining, according to data compiled by Bloomberg. Ultra Electronics, Avast, Meggitt, Morrison Supermarkets and Sanne have all received bids in recent weeks.
Potential buyers “are continuing to scour a long-undervalued universe of UK-listed entities where, despite the easing of Brexit and pandemic uncertainties, market dislocation persists,” said Josh Rosen, a London-based analyst at UFP who covers event-driven situations in Europe.
“We expect a further wave of inbound M&A as a combination of pent-up demand and years’ worth of would-be transactions work their way through the turning cogs of the equity markets,” Rosen said.
The reason for the interest is clear. The valuation gap between the UK and other large markets has increased, as shown by the ebitda multiple of the MSCI UK index, a metric commonly used to value M&A targets. The UK stock market is now trading at a 50% discount relative to the US compared with about 11% five years ago.
“The UK in particular seems to have an awful lot of companies that are very well-run and over the long term have good returns, but are generally quite often underappreciated,” said Toby Clothier, head of global thematics and strategy at Mirabaud Securities in London. Cyclical stocks, in particular, trade at “very, very low multiples,” he said.
The notion that some companies and industries will benefit more than others in Britain’s postBrexit, post-pandemic environment has put the focus on names in the industrial and consumer sectors.
Brewer Marston’s and supermarket chain J Sainsbury were name-checked as potential targets, while Entain, which owns brands such as Bwin, Coral, Ladbrokes, PartyPoker and Sportingbet, appeared on the watch-list of nine of the 15 desks polled by Bloomberg. The company is said to be a target for MGM Resorts International.
Beyond Entain, the valuation of consumer and industrial stocks relative to the market has increased because of deal activity and speculation. UK industrial shares are now 70% more expensive than the MSCI UK’s valuation multiples, a rise from 40% over the past six months. Meanwhile, consumer stocks saw their valuation premium expand from about 20% to 40% over the same period.
Caroline Simmons, UK chief investment officer at UBS Global Wealth Management, agrees that the UK is undervalued, but says the overall picture is more complex. “The UK does trade more cheaply than Europe, and it does trade more cheaply than its historical discount,” she said.
Still, Simmons says bidders are looking to target class-leading companies as well as those ripe for a strategic overhaul. While some of those are small and affordable, Britain’s industrial sector is trading more expensively that its international counterparts, Simmons notes.
On the regulatory front, the UK appears to be more flexible than other European nations. Morrison’s takeover by a buyout firm has gone ahead without triggering government intervention, while France vetoed Carrefour’s merger with Couche-Tard. Ultra’s takeover by Advent International will be probed by the UK on national security grounds.
Mirabaud’s Clothier predicts “at least one notable deal a week on average” during the rest of 2021. “All things infrastructure, property, and then things that are depressed and cyclical but recovering,” he said.
“There are many, many, many UK companies that are super vulnerable to M&A activity.”